Audrey Laporte in the Citizen: It's time to face the economic realities of health care

In an op-ed in the Ottawa Citizen, Audrey Laporte, author of the MLI report "How markets can put patients first" writes that Canadians shouldn't let struggles with the U.S. system under President Barack Obama make them complacent about the flaws in their own system. "Canadians have, over the years, got into the habit of comparing our system with the U.S. system and concluding that, since we are doing so much better than they are in so many aspects of health care, our system is working just fine", she writes. Laporte argues for an approach that sees economics, rather than central planning, lead us to a more efficient and patient-centric system.

Audrey Laporte, JANUARY 16, 2014

The bungled rollout of ObamaCare may have occasioned a certain amount of smugness among Canadians. It shouldn't. Instead, it should prompt us to take a serious look at the issues facing our own health-care system.

That's easier said than done: Canadians have, over the years, got into the habit of comparing our system with the U.S. system and concluding that, since we are doing so much better than they are in so many aspects of health care, our system is working just fine.

That's setting the bar far too low. The U.S. system doesn't deserve the name "system" at all, rather it's a Rube Goldberg device, built up over the decades by a process of responding to problems by making quick fixes and then, a few years later, making fixes for the problems caused by the first set of fixes, without ever stopping to think deeply about the fundamental problems. The best one can really hope of ObamaCare is that it will turn out to be such a mess that the Americans will finally be forced to think rationally about health care.

We Canadians have to do some rational thinking, too, but our questions are different.

The U.S. health-care system has built into it a serious inflationary bias, meaning that they pay more for care than any other peoples in the world. Our system doesn't have that problem — but neither do most others. Our system's problem lies in the areas of inefficiency and inflexibility.

Efficiency has become a dirty word in health-policy debate; it is taken to mean cutting costs by cutting services.

In fact, to an economist, efficiency means getting the greatest bang for the buck, where the bang is defined in terms of what the end-users of the system want and need. And, though it is practically anathema to say so in Canada, efficiency cannot be imposed by a handful of central planners; it will be achieved only when all of the key players on both the demand and supply sides have skin in the game.

In other words, it has to be in the interest of the patient that she use the system appropriately and in the interest of the provider that she organize her practice in a manner which best meets the needs of the patient.

Economists refer to this as "incentive compatibility." And, contrary to the Canadian mythos, it will be achieved only when the market has some role to play in health care.

This doesn't mean throwing out the entire public infrastructure. When we say that patients have to have skin in the game, that doesn't necessarily mean a lot of skin. Prices don't have to be high to encourage efficient use; think of the impact of a five-cent charge for plastic bags.

There's lots of evidence from the U.S. and (more palatably to most Canadians) elsewhere that patients will respond rationally to modest user fees. More to the point, there is plenty of evidence that suppliers will adjust their prices in response to the way patients respond to having to pay those prices.

Think, for example, about reference pricing. This is a device used in a number of European countries under which the public insurer sets the price it will pay for any member of a class of drugs but doesn't set the price to the patient — the drug companies are free to set the price they will charge patients for their product.

It's not unknown in Canada: a private insurer will often set a dollar limit on the price it will pay for eyeglasses and leave the client to decide whether they are willing to pay out of pocket on top of that.

The European evidence is that, when the public reference price is cut, the price charged by the suppliers also falls, with little change in the price paid out of pocket. Recently a major insurer in California adopted reference pricing for hospital services, rather than negotiating a separate price with each hospital with which it dealt, and found that even the highest-priced hospitals slashed their charges to the level of the reference price.

We need an economically rational health-care system. In such a system there would still be an important role for government, but it wouldn't be as monopoly insurer or as micro-manager of the organization of the way each supplier does its business.

Its primary function would be quality control. There might, for example, as in a number of European systems, be competition among insurers subject to the requirement that they all cover a certain core of essential services, to honour medicare's promise that nobody would be denied necessary health care for financial reasons.

Our system is showing its age. There is lots of room for improvement, but improvement requires openness. We need to start giving serious thought to what innovations we might adopt from other countries.

Audrey Laporte is director of the Canadian Centre for Health Economics and an associate professor of health economics at the Institute for Health Policy, Management and Evaluation, University of Toronto. She is the author of the Macdonald-Laurier Institute publication, How Markets Can Put Patients First: Economics Before Politics in Canadian Health-care Delivery.